The Supply Chain Triangle or How the Supply Chain Always Finds a Way and Survives?

The supply chain comes to life, operates, learns, evolves, changes, adapts, and progresses. It is not defined in vain as the flow of materials, services, information (and finances). Information manages, coordinates, sends instructions, balances supply and demand. Procurement, logistics, and production achieve delivery. All processes unfold on a continuum between efficiency and effectiveness. To better understand this resilient chain, it is crucial to comprehend the Supply Chain Triangle: services, money, and cost. In other words, balancing the Supply Chain Triangle.

In terms of services, the goal is to maximize the service level, however measured. Delivering goods or services on time, in the correct quantity, at the right place satisfies the customer. This involves increasing the product portfolio's diversity, flexibility in payment terms, and delivering high-quality products consistently available to customers. However, these goals come at a cost, and managing costs is essential. Typical costs are associated with procurement, logistics (transportation and storage), and production. Optimizing working capital, especially inventory management, is also crucial. How do companies juggle to balance these three aspects?

To answer this question, let's create a clear picture of what happens in the Supply Chain Triangle. What does balance mean, what does trade-off mean, and can we excel in all three vertices of the triangle? Is it sufficient to define strategies once and apply them for balance, or should we continuously review and align them with changing circumstances, subsequently communicating changes to the involved functions? Let's consider a few examples.

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Geopolitical Situation

For instance, due to the situation in the Red Sea, maritime traffic now circumvents Africa, increasing transportation costs. When transportation costs rise (bottom right vertex of the triangle), inventory (bottom left vertex) can be used for balance. However, is there sufficient inventory? Considering post-pandemic times, it is likely that stocks created by both companies and consumers still exist. Companies that neglected inventory management during the pandemic now fear high transportation costs. Additionally, interest rates remain high, limiting free capital for spending and investments. People are more likely to spend on travel than on goods arriving from China. Many companies have shifted to suppliers in Turkey for raw materials. Those who haven't learned from the pandemic struggle and fear the route around the Cape of Good Hope. In most cases, the third vertex, services, remains stable, except in the case of a major shock.

Digital Transformation, Big Data, Data Analytics, Artificial Intelligence

All these contribute to each of the three goals in the Supply Chain Triangle. Artificial intelligence is rapidly developing and implementing, and there's no turning back. The link provides details on artificial intelligence in the supply chain, covering various points along the chain. For instance, CRM and chatbots are used to track consumer trends, maximizing service. Advanced demand and supply alignment methods, such as machine learning, aid in better inventory management, contributing to optimizing working capital. Digital tools minimize transportation costs, help in choosing suppliers based on multiple criteria, and optimize production.

Agility and Resilience

One thing is certain: every prediction about the future is wrong! Whether predicting demand, orders, delivery times, quantities delivered, disruptions in transportation, or disruptions in production, the future cannot be predicted with absolute accuracy. Therefore, we must develop scenarios, not just one plan. An if-then-else analysis is necessary to prepare for an uncertain future. This ensures the supply chain is ready to promptly react to disturbances and disruptions from the environment. Agility and resilience cannot be achieved by a single company; the entire supply chain must work on them. This way, the supply chain will quickly adapt, and the Supply Chain Triangle will balance.

ESG – Environment, Society, Governance

ESG stands for environmental, social, and governance principles of sustainability. Climate change, demographic and migration changes, ethics, corruption, and lack of transparency are all part of ESG. Is ESG just a fashionable term, or does it represent something meaningful and useful? How much attention do management structures give to ESG? "Business must focus on profit; there's no time for ESG!" How often have you heard this statement? Isn't it possible that many still don't see the negative consequences of a poor relationship with the environment and society and the ignorance of poor leadership?

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The daily number of ships through the Panama Canal has decreased due to drought and low water levels in Lake Gatun, impacting delivery times and reducing service levels (top vertex of the triangle). The cost vertex can react with larger volumes and longer production cycles. Alternatively, working capital can respond with previously created inventory. However, should we focus on that, or would it be better to address climate change?

Concerning the social principle of business, we must address people in the supply chain. We want satisfied employees who feel secure, live their purpose, learn, develop, and show initiative. Leadership with vision, empathy, emotional intelligence, ethics, and integrity is essential. Thus, the Supply Chain Triangle is expanding with two more vertices, emphasizing the supply chain and sustainability (pentagon).

The Supply Chain Always Finds a Way to Survive

Do we observe the constant push-pull dynamic in the Supply Chain Triangle? The continuous interaction, interconnectedness, and, consequently, the influence of decisions in one component of one vertex on the other vertices and their components? For all of this to have a positive result, collaboration, coordination, transparency, trust, and visibility of the entire chain are necessary. With the examples mentioned, the functioning of the dynamics of the Supply Chain Triangle is clearer. It is crucial to consider all vertices of the triangle, but it is also clear that we cannot excel in all vertices simultaneously. Because the goals are in conflict, if one vertex worsens, another vertex will pull it up but at the expense of itself or another (third) vertex. This is an ongoing story, and there's no room for panic when one vertex faces a bad situation; another vertex (or vertices) will pull it up. What matters is being clear about your goal. Which vertex is a priority, which one will be the focus, to what extent will it be favored, and when will priorities in the triangle change? If we increase the price to the end customer due to rising transportation costs from the Red Sea situation, we will compromise the service vertex. If we created inventory earlier, we don't have to raise prices, but we compromise the money vertex. If we found an alternative supplier earlier, the cost vertex will take care of itself. The solution always exists; it's crucial to be aware of the Supply Chain Triangle and the possible strategies available, then take action.